Is Universal Technical Institute (NYSE:UTI) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Universal Technical Institute, Inc. (NYSE:UTI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Universal Technical Institute

How Much Debt Does Universal Technical Institute Carry?

The image below, which you can click on for greater detail, shows that Universal Technical Institute had debt of US$120.9m at the end of September 2024, a reduction from US$156.5m over a year. However, its balance sheet shows it holds US$162.4m in cash, so it actually has US$41.5m net cash.

How Healthy Is Universal Technical Institute's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Universal Technical Institute had liabilities of US$205.0m due within 12 months and liabilities of US$279.4m due beyond that. Offsetting this, it had US$162.4m in cash and US$37.3m in receivables that were due within 12 months. So it has liabilities totalling US$284.7m more than its cash and near-term receivables, combined.

Since publicly traded Universal Technical Institute shares are worth a total of US$1.43b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Universal Technical Institute also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Universal Technical Institute grew its EBIT by 149% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Universal Technical Institute can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Universal Technical Institute may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Universal Technical Institute created free cash flow amounting to 19% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Universal Technical Institute does have more liabilities than liquid assets, it also has net cash of US$41.5m. And we liked the look of last year's 149% year-on-year EBIT growth. So we are not troubled with Universal Technical Institute's debt use. We'd be motivated to research the stock further if we found out that Universal Technical Institute insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.